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May 2, 2011

Opinion: Limiting state borrowing means less construction

By PAT McGARRY
AGC of Washington

Construction spending by the state could shrink by $8.6 billion over the next 20 years should a proposed amendment to the state constitution be enacted.

AGC opposes a legislative resolution (SSJR 8215) that seeks to reduce what the Legislature can borrow by gradually lowering the debt limit in the state constitution from its current 9 percent of state revenues to 7 percent. Such a move would have to be passed by a vote of the people on the fall ballot because it involves amending the state constitution, but the first step is passage by two-thirds of both houses of the state legislature.

SSJR 8215 has already been passed by the Senate. Even though the legislative session has ended, this matter will continue to be considered as part of the budget negotiations in the special session called by the Governor.

While a proposal to reduce the state's debt might seem attractive at first blush, AGC maintains that doing so would not only harm the construction industry, it would also hinder private economic development.

Washington state is unusual compared to most other states in the level that the state helps fund local construction projects such as schools and local drinking water systems. This means the state has a higher-than-average debt obligation, but that fact alone is no reason to lower the debt limit. On the contrary, the current 9 percent limit allows the state to fund infrastructure construction projects that provide thousands of jobs in the short term and facilitate private economic development for the long term.

Reducing the debt limit could increase by a relatively small amount the funding for other general government budget spending. But at the same time it would severely reduce the ‘seed corn' the state invests on future economic growth. We're all concerned about the state's budget challenges, and public construction has already been cut considerably to balance the books, most notably, the legislature has raided the Public Works Trust Fund.

The construction industry is not alone in being concerned about the ramifications of this proposal. Environmental groups are concerned that the proposal would stunt the momentum achieved in Puget Sound clean-up efforts by reducing funds to build state-of-the-art stormwater and water treatment facilities. Education groups are justifiably concerned that less funds would be available to improve or build new schools — a particularly important point as the state funds about one-third the cost of school construction.

One of the arguments used by proponents of the debt limit reduction legislation is that the percentage of the state budget reserved for funding debt obligations has increased. In fact, debt service payments on debt limit bonds rose from 4.8 percent of the general fund 10 years ago to 6.1 percent this year. But a major reason that the ratio has increased is the economic downturn, which is reducing the size of the “denominator” (overall revenue). As the economy improves, that ratio will decline to normal levels, and in any event it remains well under current limits.

Lowering the constitutional debt limit would diminish the state's ability to provide needed infrastructure by taking $8.6 billion off the table over 20 years, while providing only 1 to 2 percent to the operating budget.

SSJR 8215 also seeks to stabilize debt capacity by extending the calculation period for determining average annual general revenue from the current three-year “look back” period to a 10-year average. This modest improvement in predictability is a good thing but is gained by significantly diminishing debt capacity and the ability to build needed infrastructure.

Pat McGarry is the president of AGC of Washington.


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